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National Grid to Merge With Lattice
In a Stock Deal of About $8.5 Billion

By

Anita Raghavan and

Robin SidelStaff Reporters of The Wall Street Journal

Updated April 22, 2002 7:35 a.m. ET

LONDON --
National Grid Group
PLC, marking the latest in a wave of consolidations gripping Europe's power sector, announced a merger with
Lattice Group
PLC, in a stock deal valued at more than $8.5 billion.

National Grid Group, which runs Britain's power-transmission network, is one of the more acquisitive United Kingdom power companies, having snapped up Niagara Mohawk Power Corp. of the U.S. two years ago in a deal valued at $3 billion. Its move to buy U.K.'s Lattice, a gas-pipeline operater that was spun off from British Gas a couple of years ago, comes amid rumors in the British press that National Grid was on the lookout for another acquisition in the Northeastern U.S.

The deal between National Grid and Lattice, which is likely to draw intense regulatory scrutiny, could still fall apart. Under the proposed transaction, National Grid also would assume about $10 billion of Lattice debt.

If completed, the merger would continue a trend that has prevailed all year. Despite a lackluster mergers and acquisitions market, the utility sector has been one of the bright spots on both sides of the Atlantic. Just last month, for instance, Germany's
RWE AG
acquired U.K. power supplier
Innogy Holdings
PLC in a deal valued at &euro;8.4 billion ($7.5 billion), making it the second-largest deal in Europe in the first quarter.

Utility deals accounted for almost one-fifth of European M&A volume in the first three months of the year, making it the hottest sector in European M&A, according to Thomson Financial, which tracks corporate-finance activity. European deals involving the acquisition of either an electricity-, gas- or water-distribution company totaled &euro;24.1 billion in 58 transactions in the first quarter.

And there is no sign that the frenzied activity is abating. Germany's
E.ON AG
, for instance, is on the prowl for an acquisition in the U.S., and investment bankers specializing in the industry say discussions involving other companies are taking place both domestically and abroad. The prospects for deals remain somewhat cloudy, however, because of the recent volatility in stock prices and complicated regulatory issues in the U.S.

Also, many power-company executives are skittish about embarking on merger talks until the fallout from the bankruptcy of Houston energy concern Enron Corp. has filtered through the market. Still, investment bankers are optimistic that the merger mania will continue in large part because the power industry is going global. What is more, some power players such as RWE, Germany's largest power concern, are keen on becoming global multiutilities, offering waste services, water and natural gas, in addition to electricity.

The proposed deal comes after Lattice Group earlier this year announced that it would cut 2,400 jobs in response to tough pricing targets set by regulators.

In Friday trading on the London Stock Exchange, National Grid Group closed at 490 pence ($7.10), up 4.5 pence, and Lattice Group fell 1.25 pence to 172.75 pence.